Check the rear view mirror...
THIS week, we take a look back at the first quarter of 2021 to see if we can get a sense of how things are shaping up for the rest of the year. With this look in the rear view mirror, can we hope to pull out safely into the fast lane?
Quarter one has provided a few surprises in terms of asset class returns. Diversified commodities (oil, metals, livestock etc) being top of the leader board has raised some eyebrows, as has the pace in the sell-off of government bonds.
The primary influencing factor has been the sharp recovery in both incoming and expected economic activity. The continuing decline in Covid infection rates around the world (with some exceptions such as India) alongside a powerful, and still growing, fiscal response from governments, have also had a part to play in market movements. In this context, stocks have continued to rise in spite of sharply higher bond yields.
Our expectation is that as world economies wake up from their enforced slumber, there will be a sharp acceleration globally. We expect the early effect of unleashing pent up consumer forces will help to replenish sectors affected by the last year’s lack of consumer access.
These forces will further augment the fiscal responses of governments to feel like a boost. However, how long the boom lasts, and whether it will inevitably be followed by a bust are questions that will continue to vex markets and their participants for the next few months.
We would be wise to expect this boom to be brief and uneven, even if the risks may be tilted a little to the upside of expectations here. We’re not seeing an equivalent to the roaring 20s just yet, as there’s still too much uncertainty beyond our own backyard.
The pace and variety of vaccination campaigns across the world will have an impact, as will the distribution of those pent-up consumer savings. As an interesting rule of thumb, the more that has accrued to the higher earners, the less we should expect to be immediately spent.
Looking ahead, this coming quarter should see the US infrastructure effort start to take shape and there is no doubt that its scale and ambition will have both an economic and a psychological effect on market confidence.
To what extent this bill will be shaped by bipartisan hands, and the degree to which it will be offset by rising taxes when, and if, it makes it through Congress, remains to be seen.
Even if we are in the foothills of a short-term economic boom, our in-house investor sentiment indicators do not suggest that investors are particularly giddy at the prospect just yet. There remains a sense of watchful caution.
Stock market valuations are high, but not asphyxiate. There are certainly pockets of exuberance: Bitcoin being the most obvious. Our opinion remains that it continues to be best avoided with any money you care about, even if stories of widening adoption have pumped some air in this quarter.
Some investors have been guilty of the familiar investing crime of over-confidence and extrapolation in the wider markets. However, most expect the context to remain pretty friendly for investors for a little while yet.
It’s far from plain sailing just yet and there remains plenty of fuel for those looking to keep themselves up at night. For a start, the key milestone of global herd immunity remains years rather than months away. In the meantime, health experts are also considering what threat the evolving virus variants will pose to vaccination success in the longer term.
However, to finish on a positive note, we should not lose sight of how far we’ve come from the chaos and fear of March last year.
Policy-makers had powerful financial ammunition and, mercifully, they used it to a degree that was hitherto unheard of. Analysis of the shortcomings of crises past was certainly helpful. This, alongside a demonstration of the combined power of accumulated scientific knowledge and modern technology, banished (for now) the potential for instantaneous dystopia.
We enter Q2 with optimism and a sense of relief that the potential economic catastrophe we faced this time last year has been cushioned and mitigated against. Undoubtedly, there has been both business and personal loss, but there has also been innovation, ingenuity and generosity of fiscal support that we could never have imagined.
As the UK and Ireland’s lockdowns gradually ease, we can see the opportunity to get the economic wheels back on the road and get back up to speed.
Mirror… signal… manoeuvre, we’re pulling out of the slip lane on to the motorway, but like every careful driver, let’s keep our wits about us.
Cahir Gilheaney is a wealth manager with Barclays Wealth & Investment Management team in Belfast.